The idea of a monetary union between the Gulf Cooperation Council (GCC) countries was proposed at the recent summit held in Kuwait on Dec. 10-11. The idea seems closer to being realized than ever before, especially after Saudi Arabia, Kuwait, Bahrain and Qatar agreed to establish a unified central bank that will issue a unified currency starting in early 2015. This ambitious project had faced many obstacles, and Oman and the United Arab Emirates decided to abstain. The sovereign debt crisis that affected the eurozone and its impact on the exchange rate for the unified European currency were food for criticism.
There are a lot of misconceptions regarding the unification of Gulf currency. For example, Kuwaitis believe that their currency is the strongest on the global level because it equals $3.50 (2.60 euros or 2.20 pounds sterling). However, this is false, because [a currency's strength] relates to the amount of money that can be purchased in other currencies under the prevailing exchange rate. The Kuwaiti currency is linked to the exchange rate for the dollar and other major currencies, and is used locally, not in international trade.
Gulf citizens think that a unified currency could lead to higher inflation and an increase in the burdens they face in their lives. The euro faced similar reservations and was rejected by certain countries after a popular vote. However, the price of any currency is determined by economic variables and developments taking place in the country, such as an improvement or deterioration in sovereign revenues or foreign exchange reserves, not to mention political and security factors.
Certain conditions should be met before countries can unify their currencies. Most importantly, they should adopt compatible fiscal policies, determine basic standards for current and capital spending and put a ceiling on debt and interest rates in the government budgets. The concerned countries must also agree on an economic philosophy, including the role of the private sector and issues related to the relationship between the public and private sectors. Monetary unity in a number of EU countries was strengthened by a harmony in economic policies in those countries, after all of them adopted the principles of a market economy and free competition.
Perhaps the [main] challenge faced by countries of the eurozone in the past few years was the lack of commitment to the budget deficit ceiling that was specified in the Maastricht Agreement. The latter set the budget deficit ceiling at 3% of the gross domestic product, yet no eurozone countries adhered to it. Heavy social burdens were one of the reasons for high deficits in countries such as Greece, Portugal, Ireland, Italy and Spain.
However, things are different in the Gulf, where the public treasury in each country depends primarily on oil revenues. Although the percentage that non-oil revenues contribute to total revenues varies somewhat from country to country, this percentage is very small in all of the Gulf states. There is no doubt that this dependence on oil revenues and the dominant role played by the state constitute the most important challenges for the proposed monetary system.
In addition, the fact that the proposed currency will be pegged to the US dollar — which is the currency used for oil sales and for Gulf investments in OECD [Organization for Economic Co-operation and Development] countries — is not out of the ordinary, since currently the local currencies are also pegged to the dollar. However, the unified currency is a good basis for strengthening bilateral trade and two-way investment in the countries of the region. The [proposed] currency's value will be determined according to what happens in the oil market, as well as by fiscal and monetary developments in the key countries that the Gulf states deal with.
The unification of the currency will enable Gulf states to create a mass of new cash that can be employed in trade deals with regional countries and traditional commercial partners. This new currency could one day become an important currency for international transactions, as is the case of the dollar, the euro, the yen and others.
The success of the unified currency — coupled with the achievements in the Gulf market and the strengthened economic coordination and integration — could improve the position of the GCC countries in the coming years and decades. These states achieved national outputs that exceeded $1.2 trillion, an important level that could enhance the strength of the proposed currency.
The unified Gulf currency should be considered an important tool in the process of economic integration between Gulf states that was emphasized in the GCC's [founding] charter more than 30 years ago. These countries must employ unification mechanisms in various financial and monetary fields to diversify their economic base and improve economic activity. The steps taken by Gulf countries — such as agreeing on a central bank to be based in Riyadh and launching studies related to monetary policy and mechanisms for issuing currency — confirm that there are clear irreversible inclinations toward establishing a single monetary zone in the coming years.